There are many reasons why people invest in real estate; value appreciation, tax write-off, and generating cash flow are some of the most popular. If you can buy real estate when the market is down, it is possible to make really good profits by waiting until the market improves, as it invariably does after some time. Traditionally, investors used to buy property with finance obtained from banks and credit unions or mortgage companies, however, things changed after the housing crisis of 2008 with these lenders implementing guidelines that were far more rigorous. To qualify for a loan, you would be required to have a good credit score of above 740, an employment history that is stable, a low debt-to-income ratio and proof of having liquid reserves of expenses of six months or more. For a lot of investors who find themselves suddenly ineligible for loans from conventional lenders, the only options are to either use cash or finance the investment with a hard money loan. While these alternative options do have the advantage of requiring far less paperwork, you need to know also the other advantages and disadvantages before proceeding.
What Is Hard Money Lending
A hard money loan is simply another name for a cash loan typically backed by real estate. These loans are normally available from individual private investors or a fund created by a group of them as opposed to traditional financing from banks or credit unions. Hard money loans are typically extended for the short term, which may range from overnight to as long as a couple of years or even longer, as per the terms of the agreement. Borrowers are normally expected to pay only the accrued interest every month and the principal payment is paid off at the end of the term in a single shot. While conventional banking or online lenders depend on the repayment capacity of the borrower to evaluate the amount of loan to be extended, hard money lenders take into account only the current market value of the property for which the loan is being taken. If the loan amount is more than what the loan-to-value criteria of the lender permits, other properties owned by the borrower may be used as collateral. However, if the borrower has a buyer lined up, it is possible to get 100% of the value of the property as a loan, as per forbes.com.
The prime concern of hard money lenders is the value of the property and while there is still some credence on the borrower’s credit, it is not really a critical factor for lenders. As a result, hard money lending is extremely viable for borrowers who do not have the credentials to borrow from banks but can offer sufficient collateral. Most people are puzzled by the term “hard money”; it does not mean that the loan is hard to get but refers to the asset being real estate that is considered to be a hard asset. Actually, the financing is pretty easy due to the lack of cumbersome paperwork and bureaucratic processes that banks are famous for; however, borrowers need to have equity in the property to the extent of 30-50%
Advantages of Hard Money Lending
The biggest advantage of hard money lending is that borrowers who simply don’t meet the eligibility criteria of conventional banks but have a lucrative real estate opportunity can secure funds as long as they are able to offer adequate collaterals. Since hard money lenders do not place much importance on the credit score of applicants, even borrowers with poor credit scores can obtain hard money loans with ease. Another significant benefit of hard money lending is that the speed of a loan application processing is very fast compared to the painful bureaucratic system followed by conventional banks. The loan approval is quick simply because the borrower does not have to submit detailed financial statements disclosing the cash flow, profit projections, the balance sheet, and profit and loss statements, and bank statements. The only concern of the lender is the market value of the property because they need to sell it off in case of a default. Once a relationship is established with the lender future loan applications are expedited even more giving borrowers the opportunity to close deals for which there might be severe competition. For more please visit nationaldebtreliefprograms.com.
It is more possible for borrowers to customize the terms and conditions of the hard money loan agreements depending on the circumstances. Tailor-making of the contract is possible simply because hard money lenders do not follow underwriting methods that are standardized. This flexibility allows you to tweak the repayment period as well as the schedule. Lenders are more willing to listen to you because they know the dynamics of the local market and know that their investment is safe with a low loan-to-value ratio.
Drawbacks of Hard Money Loans
Since the profile of borrowers is riskier, hard money loans are typically far more expensive than bank loans. Most hard money loans are extended for very short periods, sometimes even just for a few days. Loans are typically taken for periods ranging from one to five years, however, because of the steep APRs; they can be very costly indeed. Also, since a processing fee of around five percent is typically charged by the lenders, when a loan is taken for a short period, it can drive up the costs even more. Another disadvantage of a hard money loan is that the lenders prefer a very low loan-to-value ratio; it is not uncommon for loans of 50-70% of the value of the property to be given. This means that the borrower has to either offer more collateral property or make a large down payment on his own.
Conclusion
Hard money loans can be very useful for short-term loans by people with less than impeccable credit. These loans have been long used by fix-and-flip real estate investors who buy a property, renovate it, and sell it off within a very short time frame and repay the loan. Since the returns can be very handsome and the approval process quick, investors don’t mind the steep costs.
